Call it green, ethical or sustainable, this type of investing is never far from the lips of investors. But in recent years they have been slow to put those words into action.

Worse still, firms such as Henderson Global Investors and Aviva Investors have scaled back their dedicated sustainable and responsible investment teams.

Northern Trust Asset Management, which invests $58.4 billion across a range of environmental, social and corporate governance strategies, said in a report that “current academic research in [environmental social and corporate governance] leaves us unclear as to whether a pure orientation toward ESG issues is a positive or negative source of excess return”.

This sluggish level of interest is particularly evident in North America, where almost 90% of assets invested have yet to follow sustainable investment strategies, according to last year’s Global Sustainable Investment Review.

But in Europe there are signs that ESG investing is back on the radar. Institutions such as Northern Trust and Bank J Safra Sarasin have recently bolstered their sustainability investment ambitions. Northern Trust made a high-profile hire for its new role of global head of environmental, social and governance, while Swiss private bank J Safra Sarasin launched a corporate sustainability board.

In private equity, French debt investor Tikehau Group last week signed up to the United Nations’ principles of responsible investing. Total signatory assets under management under the principles of responsible investing had grown to more than $45 trillion by the end of April 2014.

Meanwhile, in the UK, the Law Commission paved the way for the increased adoption of ESG by pension scheme trustees when it stated in a report this month that trustees should take into account the “risk to a company’s long-term sustainability such as ESG factors”. Until recently, trustees have often opted to concentrate on investment returns.

Hermes has been a vocal advocate of ESG investing. It recently launched the Hermes Global Equity ESG fund, which looks to invest purely in companies that have positive ESG credentials.

It also produced a study which stated that well-governed companies outperformed their poorly governed counterparts by an average of more than 30 basis points per month between 2008 and 2013.

Nevertheless, the study’s findings were less impressive when it came to the benefits of ESG-specific investments. And it could be argued that well-governed companies should outperform their less well-run counterparts.

As for purely environmental and social factors, Nusseibeh maintains that there is “anecdotal evidence” that these factors boast investment returns.

However, while lamenting that many fund managers still do not pay enough attention to ESG or long-term investment strategies, he acknowledges that they are responding to the whims of their clients.

“Fund managers are subject to what the asset owners tell them,” he said. “If [the owners] hand out three-year mandates which are to be reviewed every year, fund managers will behave and act accordingly – it does come down to the likes of pension schemes to start caring about long-term returns.”

Regional breakdown

Either way, it might be a while before enthusiasm for such moves catches on in the US. The Global Sustainable Investment Review found that of the $13.6 trillion of ESG-invested funds globally, Europe accounted for $8.8 trillion, or 65%. In contrast, the US, the world’s biggest regional market by assets under management, contributed $3.7 trillion, or 27%. The US, widely regarded as a more capitalist-oriented society than Europe, appears yet to be convinced of the investment merits of ESG strategies.

Yet Northern Trust’s new global head of environmental, social and governance Mamadou-Abou Sarr, insists that there is now a “shift towards a broader acceptance” of ESG in the US. Sarr said: “The difference is basically the level of acceptance and application from asset owners in the US. Large asset owners are embracing ESG for the time being in the US.”

Yet if ESG investment demand is on the rise, will more asset managers try to persuade investors of their green credentials in a bid to tick the ethical investment box?

If so, Matt Christensen, global head of responsible investment at Axa Investment Managers, would welcome
the challenge. “I don’t fear it. This would mean that the market is growing and that people are putting their feet in the pool and investors can ascertain the quality of the strategy,” he said.

Nor is it a development that would perturb Nusseibeh. “Fund managers need to make money and look for business advantages,” he said. “At some stage they will say [ESG investing] is a very good advantage. More businesses will take it seriously and from ticking boxes they will upgrade their efforts.”

• The debate on ESG performance

One piece of evidence market onlookers refer to when highlighting the demise of sustainable investment strategies is Henderson’s decision to lay off its dedicated socially responsible investment funds team at the end of 2011.

At the time, the Ethical Investment Association described the move as sending “completely the wrong message out about ethical, SRI and sustainable investment”.

And it led critics to question whether SRI strategies are sustainable given that fund managers are judged on returns, irrespective of their social or environmental allocations.

In response Henderson recognised the changes made in 2011 “were quite emotive for some” but insisted its commitment to SRI investment was “undiminished”.

Nick Anderson, Henderson investment manager, said: “Our clients don’t see this as a charity activity. They understand there’s a trade-off but they do want to earn a reasonable return.”

Axa Investment Manager’s global head of responsible investment Matt Christensen believes there is evidence supporting the investment performance of ESG funds but said: “It will not be the case that 100% of these funds work. For example, the majority of hedge funds don’t outperform the S&P or the FTSE 100 and ESG is similar. It’s less about ESG and more about the strategy.”

After Henderson’s restructuring, its three SRI funds moved to its global equity team. These funds take into account ESG factors and focus on the sustainability of company cashflows.

This article was first published in the print edition of Financial News dated July 14, 2014